Budget fix needed to avoid shock

Budget questions ... “The government’s track record of finding around $130 billion of savings to fund our reforms is there for all to see,” Treasurer Wayne Swan’s office says. Photo: Alex Ellinghausen

Gemma Daley

Laura Tingle – If Labor can credibly demonstrate it can fund its plans, the pressure on [Tony] Abbott to do the same could prove a decisive turning point in federal politics.

Alan Mitchell – Robert Carling has done us all a favour simply by illuminating the rapidly accumulating cost of major new spending proposals since 2010.

Editorial – Mr Swan has complained that this newspaper’s estimates are unfair because they include spending that is beyond the usual four-year budgetary forward estimates. Yet that is our point: too many of today’s promises will hit the budget outside the four-year horizon

A former federal Treasury officer has warned that the Labor government’s spending promises could add $28 billion a year to public expenditure by 2020 and collide with the rising cost of baby-boomer age pensions and healthcare.

Robert Carling, a Centre for Independent Studies senior fellow and economic researcher, said this might result in a budget crisis similar to that gripping the United States and many European economies.

Mr Carling said that to afford such new programs without a crisis, the government would have to slash existing family tax benefits and welfare payments, and he suggested the pension age would have to be raised to 70 from the present 65 and planned 67.

Sacrifices needed

The CIS is releasing a report today on Australia’s public spending by Mr Carling titled Future Fiscal Shock. With spending by all levels of government already expected to expand to 40 per cent of gross domestic product from its present 36 per cent because of an ageing population, existing programs will have to be sacrificed to make way for new spending if shock is to be avoided, the report says.

A spokesman for federal Treasurer Wayne Swan last night said the budget “is the envy of the advanced world, allowing us to deliver critical reforms to provide dignity and opportunity to more Australians’’.

“Unlike the Liberals – whose treasury spokesperson has just re-announced $70 billion of unfunded promises – the government’s track record of finding around $130 billion of savings to fund our reforms is there for all to see,’’ the spokesman said.

The CIS analysis suggests there is a window of several years to fix rising spending before taking the same path of unsustainable spending as nations of the northern hemisphere.

Welfare highlighted

Mr Carling, who has also held positions with the NSW Treasury and the World Bank, told The Australian Financial Review welfare might have to be redesigned.

“Social security and welfare, I guess family tax benefits and the aged ­pension, disability support pensions, these kinds of things and the whole system might have to be redesigned, reformed to lower the costs of the public sector,” he said.

The CIS report says a much larger GDP share of spending will mean higher taxes, ballooning debt or both. But a senior government source said “the CIS have shown time and time again they’ll use whatever dodgy modelling they can rummage up to push the Tea Party agenda’’.

But the report follows the Financial Review’s calculations in August of a federal budget black hole of about $120 billion by 2020, which has become a Coalition counterclaim against the Labor government’s criticism it has a $70 billion shortfall.

“I think we’re still basically in the same ballpark [on the $120 billion] but I prefer to express things on an annual basis,” Mr Carling said.

Swan defends budget

Mr Swan rejected the Financial Review’s estimates.

He said “the 2012-13 budget keeps spending below 24 per cent of GDP over the full forward estimates – the first time a government has achieved this in over 30 years’’.

“For the record, the government found $33 billion of savings in the last budget, and $100 billion of savings in the preceding budgets. These savings are calculated over the established forward estimates periods, so would obviously be dramatically larger if calculated over the Financial Review’s new eight-year budgeting benchmark, Mr Swan said

Europe’s extended sovereign-debt woes have forced leaders to implement aid packages in Greece, Ireland and Portugal to help preserve the 17-nation euro zone, with the euro area headed back to recession.

The CIS analysis says “[Europe’s] experience should sound a warning to Australia’’.

Eleven programs such as the disability scheme, costing an eventual $10.5 billion a year including state spending, about $6.5 billion extra a year for education and the dental scheme, would add about 2 per cent of GDP in state and federal government spending.

“Over the next several years, there is a window of opportunity to anticipate this problem and adjust policies to avoid it.’’ “But governments are showing few signs of using this opportunity wisely.”

“Not all these costs will materialise, and some of them will be shared between the Commonwealth and the states,’’ the report says. If we set aside how the sharing is resolved, the menu could easily add approximately $28 billion a year (in today’s prices) to the total Commonwealth and state spending base of 2010 by the turn of the decade.”

Corporate tax earnings threat

The 2011-12 Final Budget Outcome released last week showed the deficit narrowed slightly to $43.7 billion, but a slide of almost $1 billion slide in corporate tax earnings will continue as the global economy remains fragile, the currency remains high and costs rise because of a skills shortage.

The Minerals Resource Rent Tax is also not expected to meet its $13.4 billion target in the next four years, meaning revenue could be pulled from other parts of the budget to support the policies it funds, and there are questions over how the Coalition would fund those programs as well as the future of the carbon tax.

“There are significant risks to revenue, both of a general kind and those specific to the mining resource tax and the carbon tax,” the analysis says.

Restraint urged for all sides

Parties on both sides need to “curb their enthusiasm “for launching or promising new initiatives”, it says.

“The ageing of the population is the major factor driving the slowing in economic growth. As the proportion of the population of traditional working age falls, the rate of labour force participation across the whole population is also projected to fall,’’ the report said.

“These fiscal pressures are building off a large structural spending base, adding to the size of the adjustments required. Real growth in total government spending over the 2000s exceeded the spending growth experienced in previous expansions locking in permanent increases in spending. This will compound the pressures of ageing.”